One Nation under Debt: Hamilton, Jefferson, and the History of What We Owe

Published by EH.NET (July 2008)

Robert E. Wright, One Nation under Debt: Hamilton, Jefferson, and the History of What We Owe. New York: McGraw-Hill, 2008. ix + 409 pp. $28 (cloth), ISBN: 978-0-07-1543934-0.

Reviewed for EH.NET by Donald R. Stabile, Department of Economics, St. Mary’s College of Maryland.

As the public debt of the United States heads for the $10 trillion level, Robert E. Wright’s book reminds us that a high public debt in the U.S. was not always treated as inevitable. In so reminding us, Wright, a clinical associate professor of economics at New York University’s Stern School of Business and curator of the American Museum of Finance, provides a wealth of information about the history of the public debt during the early years of the U.S. There was much debate in those early years over whether the public debt needed to be paid off, and Wright’s aim is tell both sides of the history of those debates. To give context to those debates, Wright employs a model of the development diamond. The diamond he refers to is from baseball and the four bases are government (home plate), the financial system (first base), entrepreneurs (second base), and business management (third base). In this book Wright stresses the crucial first step of getting to first base, that is, the creation of the U.S. government including the funding of its public debt and the part that debt played in the establishment of financial markets.

The book contains nine chapters. The first chapter presents an overview and sets forth the development diamond model. Chapter 2 describes how the Netherlands and England established a regular system of funding their debts through the use of financial securities, especially interest paying bonds that traded in financial markets, to be paid off from future tax receipts. In Chapter 3, Wright details how the individual colonies in America followed this pattern but with a difference; they issued non-interest bearing bills of credit that circulated as paper money until they were collected as payment for taxes. The Continental Congress used bills of credit to finance the revolutionary war but did not have the power to levy taxes that might have called in the bills of credit. Congress’ failure to establish a better system of funding led to the formation of a new government under the Constitution, the topic of Chapter 4, where Wright tells the story of the debates that took place during the writing and ratification of the Constitution.

Once the Constitution and the government it created were in place, its leaders had to fashion an effective administration and begin to manage the public debt. In Chapter 5 Wright details how Alexander Hamilton copied (or pretended to copy) parts of the European debt management plans and how he innovated new methods on his own. He also describes the financial markets of the U.S. at the time and how the funding of the debt helped them expand by offering them securities to trade. Hamilton’s proposals were hotly contested, notably by James Madison and Thomas Jefferson, as Wright outlines in rich detail.

Up to this point, Wright has told a story that is well known to scholars of the history of the public debt. In his next two chapters he makes his own scholarly contribution by describing in detail the way financial markets responded to the public debt. In Chapter 6, he researches Treasury Department records to show that bonds were held and traded by a broad cross-section of the population. These transactions took place quite readily due to the sophistication that quickly developed in U.S. financial markets and the marketability of U.S. government bonds in European financial markets. This ready marketability of bonds proved valuable when the U.S. faced the War of 1812, another subject of Chapter 6.

As another window into the functioning of those financial markets, in Chapter 7 Wright uses archives from the Virginia Historical Society to tell the stories of a broad array of bondholders in Virginia during the historical period his book covers. By establishing the way financial markets had developed to the point where government debt was liquid and easily traded, Wright shows how the first leg of the development diamond was set in place, the topic of Chapter 8. By following the Hamilton system, the federal government had established itself as a non-predatory government able to protect its citizens and their property; it also offered sound financial securities that nurtured the growth of financial markets that could trade the corporate securities needed for the development of business. Entrepreneurs thrived and by the 1830s the U.S. was on its way to becoming a developed economy.

In Chapter 9 Wright describes how, briefly, Andrew Jackson as president was able to eliminate the public debt. He did so because he thought it important for the government to be debt-free. Wright argues that Jackson’s efforts were overdone but that his belief that the debt should be kept within bounds was important. It was a belief that held among politicians in the U.S. at least until World War II. Since then, politicians have used the public debt to fund programs designed to gain them the loyalty of their constituents. What is needed, Wright insists, is a return to the arguments of Jefferson and Jackson that paying off the debt is a worthy objective of all government.

As the many secondary sources Wright draws on and lists in his references will attest, the history of the public debt of the U.S. had been often told. Wright adds to that history by including an analysis of the way financial markets handled the public debt. The book is worth reading by anyone troubled by the current disregard over the burgeoning of the public debt in the U.S., because Wright serves to remind us of a debate over the public debt that no longer takes place. He thus raises an issue that is as old as the country and as pertinent now as it was at the beginning.

Donald R. Stabile is Professor of the College at St. Mary’s College of Maryland and the author of The Origins of American Public Finance: Debates over Money, Debt and Taxes in the Constitutional Era, 1776-1836 (Greenwood Press, 1998). His next book, The Living Wage: Lessons from the History of Economic Thought, is forthcoming from Edward Elgar.

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